The Power of Simplicity in Business Acquisitions

In the world of business acquisitions, keeping things simple is key.   

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Sellers, brokers, and lenders aren't fans of complexity.  We often see buyers from mid-market M&A and investment banking backgrounds who try to use complicated mechanisms like earnouts, merging multiple companies, and working capital adjustments.   

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The problem is, sellers and their advisors usually don’t get these mechanisms, which just complicates everything.  

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SBA lenders are designed to serve clients who often don’t have much representation, so their processes and requirements are pretty rigid. The debt they offer is great—no covenants, high leverage, etc.—but you’ve got to deal with that pesky personal guarantee. It’s like trying to get a mortgage from the DMV—gotta love government bureaucracy.  Here’s a recent example:   

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A really smart, determined and experienced buyer tried to package two companies into one deal. The plan was to buy the first company and use it to acquire 51% of the second one, with the second company’s management staying on.   

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After months of planning and working with lenders, the seller of the second company got cold feet and backed out, blowing up the whole deal.  

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They were overwhelmed by the complexity!  Afterwards, the buyer told me they finally got what I’d been saying about keeping it simple.   

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On Main Street, unlike in investment banks or PE shops, simplicity is the name of the game.  

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The typical Main Street deal includes a few key components:  

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1. Purchase Price: Usually structured as 80% SBA debt, 10% equity injection, and 10% seller note.     

2. Seller Note: Paid monthly, quarterly, or annually, with interest rates between 6% and 10%. It's subordinated to the SBA and might come with a 24-month, 10-year standby, payment holiday, or interest-only period. There's also an indemnity setoff against the note.     

3. Transition Services: Ranging from a few weeks to up to a year.     

4. Exclusivity: Typically 90 days.     

5. Earnest Money Deposit: Usually none.     

6. Working Capital: Can include cash, accounts receivable, and/or inventory. 

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Often, there's no working capital adjustment.    

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Disclaimer:  

This content is for informational purposes only and should not be construed as legal advice. It is not intended to form an attorney-client relationship, nor is it considered legal advertising. For specific legal inquiries, please consult with a qualified attorney.